Can We Escape Trade Disaster In 2018?

Phil Levy
, ContributorI write about international economic policy, with a focus on tradeOpinions expressed by Forbes Contributors are their own.

While it is natural to use the turn of the calendar as an excuse to take stock of what’s coming, there is additional motivation when it comes to U.S. trade policy in 2018. While a number of trade conflicts were set asimmer during 2017, there was no resolution. Further, in the latter part of the year, President Trump and the Congress set aside their sharp differences over trade in order to unite behind a tax bill; a task that is now complete.

So what to expect in the year ahead? When it comes to U.S. trade policy, there is very little chance that that things will actually go well; optimists may instead hope for a period of quiet neglect. Pessimists have cause to set their imaginations free.

Here, then, are five topics to watch as we plunge into the icy new year:

Renegotiation of the North American Free Trade Agreement (NAFTA). This has pride of place for a reason. The talks with Canada and Mexico are the only active U.S. trade negotiations. The NAFTA talks also have one of the most credible deadlines of the salient trade issues; Mexico has important elections in the summer and originally wanted all negotiations to be concluded by end-2017. While talks are now planned through the first quarter of 2018, they do not seem to be near agreement. And neither the U.S. nor Mexican political calendars would seem to allow quick passage, even if a deal were struck. In all likelihood, that leaves two possible outcomes for 2018: a) the talks go quiet and focus on technical issues until next year; b) President Trump decides he has had enough and declares the United States will exit. Each outcome poses serious issues. Not only would a NAFTA withdrawal pose a raft of legal issues and threaten economic damage, it would hit hardest in politically-key states. But allowing the talks to carry on would mean both patience on the part of President Trump and a midterm election in which a key campaign promise is left unfulfilled.

China. Speaking of campaign promises… On the trail, Candidate Trump promised to find China to be a currency manipulator and to slap a 45 percent tariff on Chinese goods. Instead, President Trump has struck modest deals with the Chinese. There are manifold problems for the Trump administration here. Perhaps the most obvious means of attacking China – the Section 301 intellectual property investigation – may not be as easy as it seems. There seems to be no appetite for offering China the kind of carrot that could compel a serious change in its economic behavior (i.e. market economy status). And the most effective stick for prodding China would be multilateral talks, such as the ones on steel overcapacity; yet the Trump administration professes itself allergic to multilateralism. Finally, President Trump is still proclaiming a tradeoff between his economic approach to China and Chinese assistance with North Korea – a problem that seems unlikely to recede soon.

Brexit. While this is not really a U.S. trade policy problem, it is highly compelling drama and could have a serious impact on U.S. trade. In March of last year, U.K. Prime Minister Theresa May yielded her one bit of leverage over the negotiations to leave the European Union when she started a two-year clock ticking. Absent other action, the United Kingdom will be unceremoniously dumped by March 2019. Since businesses require time to plan their investments, that has brought serious pressure to clarify the terms in 2018. The problem is that there are no options that appear preferable to the status quo ante enjoyed by the United Kingdom. Expect the quixotic attempts to find one to highlight the ways in which international trade has changed over the years, as in the importance of services trade.

World Trade Organization. The curse of the WTO is that its demise is more likely to come with a whimper than a bang. Yet while there is no hard deadline in 2018 that threatens doom, there are some serious issues before a body that has largely been reduced to adjudicating disputes. China has laid the groundwork for a case claiming that it should be recognized as a market economy. Separately, there are indications the new U.S. tax law may violate WTO commitments (and there is a history of having a major U.S. tax law successfully challenged at the WTO). On top of all this, the dispute mechanism is under severe strain because of a U.S. refusal to replenish its group of judges.

The Role of Congress in Trade. Particularly in the context of the NAFTA renegotiations, a stark divergence appeared last year between the interests of Congressional Republicans and the Republican President. Why might Congress have a say? The Constitution grants Congress authority over trade. Since the 1930s, Congress has tried to delegate some responsibility to the White House, largely on the theory that the President will be less tempted by parochial protectionist urges. That theory seems no longer to apply. There are at least two obvious ways conflict could emerge in 2018. First, should the President attempt to withdraw from NAFTA, Congress could challenge his legal authority to do so (or to set tariff levels and revise regulations to pre-NAFTA levels). Second, the Trade Promotion Authority of 2015, which allows the President to negotiate trade deals, requires renewal this year. It will be interesting to see who in Congress is eager to grant such a renewal and what assurances they might require. So far, Congressional Republicans have tried to exert influence on trade quietly. That restraint may be put to the test in the coming year.

If all of these challenges turn out well, we likely end 2018 much where we started on the trade front. If not, the resulting economic and political damage could be significant.